Nigeria is finding out that attracting foreign direct investment (FDI) into a country that has a larger population than France (65 million), Italy (60 million) and Spain (46 million) combined isn’t always straight-forward.
Despite its mostly youthful large population and abundant natural resources, development economists say the level of FDI inflows into Nigeria – which state data agency, National Bureau of Statistics (NBS), puts at $1 billion on average since 2016 – is shocking for a developing country that’s home to an estimated 200 million people.
It’s the people who pay the price for the country’s shortage of FDI flows in the form of lack of jobs and rising poverty levels.
Critics say the government has been content gorging itself on the country’s limited oil wealth and has stalled in aggressively seeking foreign direct investment to provide adequate jobs for the people and entrench investment-led economic growth.
In the latest foreign investment report for the first quarter of 2020, the NBS reported that Nigeria attracted a paltry $214 million in FDI, a 13 percent decline compared to last year.
The amount Africa’s most populous nation attracts in FDI, not only in the first quarter of 2020 but every year since 2008, is one of the lowest among countries with a similar population.
Take Indonesia, Southeast Asia’s biggest economy, for instance. Indonesia has a population of 267 million and was, alongside Nigeria, one of the MINT countries classed by economist Jim O’Neil of Goldman Sachs as countries with strong economic potential and able to offer superior returns to investors in the future.
Between January and March 2020, Indonesia attracted $9 billion in FDI, excluding investment in banking and oil and gas, according to the Indonesian investment board.
That’s 42 times the amount Nigeria attracted.
Nigeria has struggled to attract tangible FDI since its last wave of privatisation in 2008 when it received $8 billion in FDI, according to World Bank data.
Between 2009 and 2015, the country attracted an average of $3 billion a year but that was enough to rank the country among the top three largest recipients of FDI in Africa.
Nigeria has, however, only managed inflows of about $1 billion a year since then, according to the NBS, and has lost its coveted top investment destination in Africa spot to smaller African countries like Egypt.
Considering the size of Nigeria’s population, $1 billion works out to $5 per head. In Indonesia, which in 2019 attracted $28.2 billion in FDI, excluding inflows to the banking and oil sectors, that gives $104 per head.
The decline in FDI for the past five years can be traced to lower oil prices as the attractiveness of Nigeria to foreign direct investors rises and falls with the price of crude oil. In the same period, Nigeria averaged 2 percent economic growth rate, which is lower than its population growth rate and considered extremely low by economists for a developing nation.
Why FDI is crucial
Nigeria’s low Foreign Direct Investment (FDI) is partly responsible for the country’s acute shortage of jobs, tepid economic growth and government’s undiversified revenues.
FDI is recognised as a powerful engine for economic growth. It enables capital-poor countries to build up physical capital, create employment opportunities, develop productive capacity, enhance skills of local labour through transfer of technology and managerial know-how, and help integrate the domestic economy with the global economy.
No country seeking to emerge as an economic powerhouse can do so without attracting FDI. It’s no surprise that the United States, the world’s largest economy, is the largest recipient of global FDI. The US attracted some $251 billion in FDI in 2019.
The higher FDI a country attracts, the better the standard of living of its people as they can easily secure jobs and invest in themselves from education to health.
Why foreign direct investors snub Nigeria
When the World Bank Group surveyed hundreds of executives at multinational companies to find out what drives decisions around foreign direct investment, the results showed that investors value a business-friendly regulatory environment as well as stable macroeconomic and political conditions.
These crucial factors are missing in Nigeria, according to some foreign investors surveyed by BusinessDay.
They point to policy inconsistency, a business environment that existing local and foreign investors say is anti-business, and the lack of political will to open up the economy to private capital.
One investor who craved anonymity said each time he has tried to invest in Nigeria, government bureaucracy has proved a difficult hurdle to scale.
“There is so much interest in Nigeria given the enormous potential it has, but if the government isn’t open to private investments, nothing happens,” the person said. “The government’s attitude towards investors doesn’t suggest they are keen to bring them in, there seems to be a lot of contentment with oil exports.”
Nigeria has made some efforts in improving its ease of business environment. The country ranked 131 on the World Bank’s Doing Business 2020 index, moving up 15 places from its 2019 spot, and has been tagged as one of the most improved economies in the world for running a business.
However, most of those gains haven’t translated to increased investment inflows. For instance, it’s still 10 times costlier to transport cargoes from the Lagos ports than it is to move them from seaports in Ghana and South Africa, according to a research by SBM Intelligence.
The Apapa and Tincan Island ports, Nigeria’s busiest ports, have been bedevilled by traffic congestion for more than 10 years and government’s efforts at resolving the problem have been grossly inadequate.
Data compiled by SBM Intelligence showed that local transport from the port in Lagos costs an estimated $2,055. This is compared to $285 spent in moving goods from the Tema port in Ghana and $208 from the Durban port in South Africa.
Another instance of the Nigerian government’s culpable role in hindering FDI is the case of final investment decisions by international oil companies worth about $20 billion that have been pending for three years when they can be resolved speedily by an honest engagement between government and the mainly western oil firms.
It’s now or never: How to attract more FDI
Many believe that the adverse economic impact of the COVID-19 pandemic on crude oil prices, and the Nigerian economy by extension, presents an opportunity to forge an investment-led economic growth strategy, much of which will depend on the country’s ability to mobilise both local and foreign direct investment.
Officials at the sub-Saharan Africa units of American multinational banks, JP Morgan Chase and Citi Bank, and local investment promotion agency, the Nigeria Investment Promotion Commission (NIPC), helped beam the spotlight on some of the biggest impediments to investing in Nigeria while suggesting ways the country can be better positioned as a quality destination for foreign investment amid an intense competition for capital globally.
The unpredictability of government policy is perhaps the biggest impediment to foreign investments, according to Ayomide Mejabi, chief economist for sub-Saharan Africa at JP Morgan.
“From my interactions with most of our clients, it’s a real headache trying to predict Nigeria’s business environment when policies keep changing at a heartbeat,” Mejabi told BusinessDay.
“It takes more time analysing Nigeria than actually investing, and even that doesn’t guarantee your investment is immune to policy instability,” Mejabi said, before urging the government to create stronger institutions to solve the problem.
Data from the Nigerian Investment Promotion Commission (NIPC), an agency of the Federal Government established to foster investments in Nigeria, shows that the country should be getting much more in terms of FDI based on announcements made by prospective investors of the investment they plan to make in the country.
However, those announcements do not often translate to actual investments.
In the first quarter of 2020, the NIPC reported investment announcements worth $4.81 billion. In actual terms, only 4 percent was achieved going by the NBS report that FDI was $214 million in Q1.
Although there tends to be a time lag between when an investment is announced and when it is made, which may help explain the mismatch, that’s only half of the story.
Since the NIPC started collating data in 2017, there’s been that mismatch which owes more to the challenges investing in Nigeria than a time lag.
The NIPC reported investment announcements worth $66 billion in 2017, $90 billion in 2018 and $29 billion in 2019, according to data on its website – each more than 20 times what Nigeria actually received.
“Direct investors, unlike portfolio investors, have a long-term horizon and are looking for stability and coherence in government policies,” Yewande Sadiku, executive secretary of NIPC, told BusinessDay.
“Although there are bad narratives about investing in Nigeria that we need to change, there are also many reasons why Nigeria is potentially more attractive because of COVID-19. It is especially important now that we have a more coordinated pro-investment approach across all levels of government, to counter the negative narrative and win the confidence of investors,” said Sadiku, who was chief executive of Stanbic IBTC’s investment banking business prior to taking up her current role at the NIPC.
“We also need to continuously work on improving our ease of business and perhaps inject some more urgency into it. Another thing we need to address is the quality of education as that impacts the quality of our labour force and the country’s attractiveness to investors,” Sadiku said.
Funmi Ogunlesi, an executive director at Citi Bank’s Nigerian unit, said the country’s treatment of local investors sets the tone for foreigners.
“It is when the business environment is conducive, encouraging and even inspiring for the local investor that the foreign investor will be even more attracted to come in,” Ogunlesi said.
She said one thing that the pandemic has taught, and which it would surely demonstrate in the months and years to come, is that there is going to be competition in the post-pandemic phase, for scarce foreign investible funds.
“The COVID-19 pandemic represents an opportunity, as others have said, for us to reset the economy and to reset the business environment in such a way that both local and foreign investors will be encouraged to look for opportunities,” Ogunlesi said.
“One good pre-pandemic initiative, which we would hope to build upon going forward, is the work on Ease of Doing Business and the initiatives instituted by the Presidential Enabling Business Council (PEBEC),” she said.
She said the country demographics, young population, large domestic market, rich commodity assets, etc., should all count for something.
“However, help is needed from government to continue to improve on the operating environment. For instance, given that global supply chains have been so severely disrupted, what reforms can be laid down within all our land and seaports and borders, so that when the borders are finally open, Nigeria develops a reputation as a fast-track centre of excellence for all port activities?” Ogunlesi said.
“There will always be challenges, but investment is built on trust. The minute investors trust that they will be treated fairly, impartially and transparently, within a competitive business landscape, they will be willing to come,” she told BusinessDay.
Resolving the thorny issues holding back FDI into the country will prove decisive in reducing unemployment rate in Nigeria, which economists predict has topped 30 percent since the NBS last put the figure at 23 percent in 2018.